“I think it is important that we broaden our conversation about inflation beyond this ridiculous suggestion that we’ve got a wage-price spiral,” said Treasurer Jim Chalmers on Wednesday last week. “If anything one of the biggest problems in our economy for the better part of a decade is that wages growth has been too stagnant.”
Driving this press-club exchanges is a report released last week by The Australia Institute. It argues that rather than a wage-price spiral, corporate profits are the leading driver of inflation at present, creating in essence a “profit/price spiral.”
The report begins with the uncontroversial fact that inflation reached 7.8% in calendar year 2022. This was twice the increase in wages, leading to an average reduction in salary-earners’ purchasing power.
The Australia Institute’s central argument is that this is essentially the product of price hikes. The report argues that corporate Australia has increased prices by A$160 billion over and above their higher expenses and productivity gains since December 2019.
The $160 billion figure arises from ABS national accounts data. Total annualised corporate profits were $507 billion in the December 2019 quarter and $701 billion in the September 2022 quarter. Just $33 billion can be accounted for by productivity gains.
Without that additional A$160 billion, inflation would be 2.7%. That is, it would be within the Reserve Bank’s target range of 2.5% plus/minus 0.5% and there would be no need for interest-rate rises.
One point not touched on by The Australia Institute is that the inflated profit figures are much less marked in small businesses. This suggests potential abuse of monopoly position by the largest corporations.
Woolworths just last week reported a 25% increase in profits. Coles’ net profit similarly increased 11%.
Qantas, meanwhile, has reduced total flights when compared to its pre-pandemic schedule in order to keep yields high.
Profits in Australia are currently at their highest-ever share of the nation’s economy, at 30% of GDP. Record profit shares are the reality across the West, as Thomas Picketty showed in Capital in the Twenty-First Century.
Sadly, Picketty also noted that there is no built-in “self-correcting mechanism” and predicted that without state intervention, the profit share of the economy could rise to 19th century levels of 40% of national economies in the West by 2100. Along the way we would have to kiss the ideal of an egalitarian society goodbye.
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